Local car pricing and economies of scale
THE prices of cars are inclusive of government levies which amount to 30 per cent of the price in the form of custom duty and sales tax.
Exclude them from the price and the local prices are comparable to anywhere in the world, except India and China in small car category only.
In these countries the small car i.e., below 1000 cc has been extensively localised and is thus free of vagaries of forex fluctuations and higher production costs overseas.
The way forward is obviously to localise. For localisation of hi-tech parts, volume is very important to make it economic, otherwise localisation will increase cost and thus price. With about 55-70 per cent localisation depending on the model, the balance parts are of increasingly higher technology requiring technical tie-ups and
Thus to reduce prices even from where they are, policies which can increase volumes should be implemented and volume decreasing policies should be eschewed
We do not have any Mittal, Ambani, Tata, Godrej, etc., who is big enough to create more economic activity, be recognised and invest off-shore. No manufacturing outposts of Pakistani industry exist. No one is big enough to do so.
Everybody is in business to make profits. It is the state’s responsibility to help companies make fair profits. Here the state’s apparatus gets envious of a company’s fair profits and creates hurdles. This actually dams economic growth as it inhibits job creation and innovation and harms the export potential. It eventually affects the quality of life of our people, who remain jobless.
The dynamics of auto industry revolves around mode and technology changes which happen every five years. This requires heavy investments; the more a model/product is localised, more is the investment every time it is changed. To offset this affect, adequate volume is necessary; otherwise, costs will go up. For the auto maker it is a catch-22 situation; if they don’t change the model the interest in their product wanes, if they do, the new product is more expensive if volume is not high enough.
The way forward is to adopt volume enhancing policies. It must be allowed to reach the internationally accepted threshold volume to take off.The automotive industry has been nurtured by every developing country until it has reached a threshold volume of 500,000 cars per annum, as it has vast forward and backward linkages and generates a great deal of economic activity. Malaysia has included it in “ Industry Plus Plus” industries.
In the last fiscal year, 178,000 cars and light commercial vehicles (LCVs) were sold. In Pakistan, the peak sales in 2007 were 245,000 units. It looked all set to reach 500,000 units by 2012, as was also envisioned by the government. Then the economy changed and difficult times set in.
Both Toyota and Suzuki came to Pakistan before they went to India. Now they are exporting from India whilst our industry is fighting for survival.
In Pakistan only 12 people out of 1000 own a car. The world average is 120; Malaysia and Thailand are above 200, the potential to grow and contribute to the economy in a big way is evident.
The way forward is to adopt and promote volume enhancement policies and let automotive industry become the engine of economic growth and development.
The auto industry is the most documented, contributes five per cent of total FBR revenue and provides opportunity for employment to over a million people besides bringing in strategic technology for the country. Yet, the government has time and again taken regressive actions against it.
Import of used vehicles at depreciated custom duties, used auto parts, import of vehicles and parts under the garb of scrap, threat of lowering of CBU (completely built-up units) duties are not actions/policies that can allow the auto industry to become the engine of growth.
Auto industry is a game changer, it has to be nurtured and protected to deliver what it can do for the economy. The Pakistani Automotive industry provides a wide range of vehicles from 800 CC to 1600 CC. Beyond this range, CBU vehicles are available.
We should be happy and proud that the leading world auto manufacturers are here. The industry has invested Rs98 billion, directly employs 215,000 persons while creating jobs for 1,200,000 persons and saves foreign exchange $ 1.5 billion per annum.
It is incorrect to say that the industry does not want a new player to enter. Let anyone come, all must play by the same rules. Special dispensations and concessions not only distort the playing field, they inhibit serious players from coming, for the same fate could await them a few years hence. Ad hoc policies, rules and favours only invite briefcase manufacturers and fly- by-night operators.
The way forward is a long- term policy, with no ifs and buts. What is the purpose of a new player coming but to have more competition, reduce prices and give better choices to the consumer? However, if brought on the shoulders of discriminatory policies, the fresh entry is at the cost of existing investors and does not lend itself to sustained growth.
The writer is vice-chairman of auto-motive division, House of Habib